When the final "bailout" structure of the Cypriot deposit-confiscatory bail-in was revealed in late March, the implied victory for the Troika (which has since notched up its demands for the insolvent country to now sell its 14 tons of gold) was that instead of the deposit haircut passing as a tax, and thus needing a parliament ratification, it would come in the form of a bank resolution, with Laiki bank liquidating and being subsumed by the remaining Bank of Cyprus, and with uninsured depositors in both banks ending up crushed. However, as previously reported, in the interim period deposit outflows have continued and accelerated despite the assorted ineffective "capital controls" which has led to additional underfunding for the local banks, and to a second bailout of Cyprus, this one rising to €23 billion or a 35% increase from the original, as part of which the Troika has demanded that Cyprus sell their gold in the open market. Now, a month later, it appears that the Troika's initial victory may have been a Pyrrhic one, as yesterday the Cypriot attorney general announced, and today the government's spokesman confirmed, that the parliament will have to ratify the €23 billion bailout of the tiny island nation after all, thereby refocusing the popular anger from some ephemeral technocrat in Europe to the country's own elected representatives, thereby changing the calculus of the Cypriot decision by 180 degrees.
As 'The Iron Lady' is laid to rest today, we thought a look back at 'economic' legacy was worthwhile. As Bloomberg's Niraj Shah notes, average U.K. public spending was lower under Margaret Thatcher than under David Cameron while the average quarterly economic growth rate was 0.6 percent compared with 0.1 percent today. However, unemployment averaged 9.5 percent under Thatcher, the highest rate seen during the stewardship of any post-war U.K. leader, despite her stalling of the 1970s downward economic spiral. From the Poll Tax riots to mining-union busting to surviving bombings, commitment to brokering peace with the IRA, and winning the Falklands' War, there were many sides to this lady, and perhaps in death she has some lessons for investors today, "To me, consensus seems to be the process of abandoning all beliefs, principles, values and policies. So it is something in which no one believes and to which no one objects." The longest serving prime minister in 150 years is receiving a ceremonial funeral with full military honors today as her legacy continues to divide the country.
Every scheme in Europe than can be rigged has been or is being rigged and, in the end, it will only be the fools that are left in this game. It is not the greater fools either but the mandated fools who take directions from Brussels who takes their directions from Berlin. We cannot emphasize enough the great risk that anyone takes now by investing in anything in Europe. You can ignore liabilities, you can play pretend and not count liabilities but in the end they are still there and the losses must be finally acknowledged. Gold gave you a head's up.
- Boston bomb probe looking at pressure cooker, backpacks (Reuters), Boston Bomb Clues Surface (WSJ) Forensic Investigators Discover Clues to Boston Bombing (BBG)
- China local authority debt ‘out of control’ (FT)
- Gold Wipes $560 Billion From Central Banks as Equities Rally (BBG)... or the same impact a 2% rise in rates would have on the Fed's balance sheet
- More Wall Street leakage: Stock Surge Linked to Lobbyist (WSJ)
- China's bird flu death toll rises to 16, government warns of spread (Reuters)
- Chinese official endorses monetary easing (FT)
- As global price slumps, "Abenomics" risks drive Japan gold bugs (Reuters)
- North Korea rejects US call for talks (FT)
- IMF Renews Push Against Austerity (WSJ)
- India Gains as Gold Plunge Boosts Scope for Rate Cuts (BBG)
- Germany set to approve Cyprus aid (FT)
- Easing Is an Issue as G-20 Meets (WSJ)
In what may be a first in at least 3-4 months, instead of the usual levitating grind higher on no news and merely ongoing USD carry, tonight for the first time in a long time, futures have drifted downward, pushed partially by declining funding carry pairs EURUSD and USDJPY without a clear catalyst. There was no explicit macro news to prompt the overnight weakness, although a German 10 year auction pricing at a record low yield of 1.28% about an hour ago did not help. Perhaps the catalyst was a statement by the Chinese sovereign wealth fund's Jin who said that the "CIC is worried about US, EU and Japan quantitative easing" - although despite this and despite the reported default of yet another corporate bond by LDK Solar, the second such default after Suntech Power which means the Chinese corporate bond bubble is set to burst, the SHCOMP was down only 1 point. The Nikkei rebounded after strong losses on Monday but that was only in sympathy with the US price action even as the USDJPY declined throughout the session.
Panic, depression, rage, suicidal ideations: watching the US mainstream media, one would think that these are the prevailing sentiments among those who unlike the prevailing "developed world" speculative class, are invested most heavily in physical old - Indians, who collectively comprise the largest end-demand consumer segment for gold products. One would be very wrong. Because while apparently it is incomprehensible to the "sophisticated" financial crowd in the US that someone may have conviction in their beliefs, and not just lunge from extreme to another, merely riding momentum and technicals like so many "professional" investors, Indians are doing precisely what a buyer should do when the price of the desired product plunges: doubling down, literally. Bloomberg reports of the immediate aftermath to the past few days' gold plunge: "Gold buyers in India, the world’s biggest consumer, are flocking to stores to buy jewelry and coins, betting a selloff that plunged bullion to a two-year low may be overdone." Wait, so instead of jumping out off high buildings, Indians are being cool, calm and collected and... buying more? Unpossible. Do they not get CNBC in Mumbai? Apparently not: "My daughter is just six months old, but I think it is never too early to buy gold,” said Sharmila Shirodkar, a 28- year-old housewife, while displaying a new pair of earrings she bought from a store in Mumbai’s Zaveri Bazaar. “I had been asking my husband every day if prices will go down more. I couldn’t wait anymore.”
It is no surprise that pension funds in the US are significantly underfunded (median 72% funded). California Public Employees’ Retirement System (CALPERS), specifically, is about 26% short of meeting its long-term commitments. Like most major pension funds, it uses smoke-and-mirrors to avoid this yawning gap by smoothing over a long enough timeframe where 'hope' for growth in assets triumphs over the reality of liabilities (through a 'rolling' 15- or 30-year window - that therefore never comes due). However, under a new plan proposed by CALPERS' chief actuary, they will shorten the horizon from 15 to 5 years and aim for a specific date 30 years from now to be 100% funded (instead of a rolling hope-driven horizon). The impact of this, as Bloomberg reports, may mean California taxpayers municipal pension contributions will rise as much as 50%. "This is clearly the right thing to do," notes the fund's CEO, "as it will reduce the risk of the system," though we suspect the 'system' may just get a little upset at having to face this 50% 'tax-hike'.
President-elect Nicolas Maduro has stern words for his opposition, Henrique Capriles, who lost by an apparent 1.8% of the vote (the closest margin in 45 years) and is demanding a recount. Capriles is urging his supporters to take to the street tomorrow to push for the recount, but Maduro warned doing so is a "death wish," as Bloomberg reports, he added, "going to downtown Caracas will fill it with blood and death." With little to lose in this zero-sum game, the protests have already turned deadly with 61 injured and 7 dead. The government's refusal to complete the recount is polarizing the country, "if supporters lose faith in formal politics, the violence will become unpredictable." The images and clips below suggest things are escalating rapidly as Maduro has called the election a choice between capitalism and socialism warning Spanish corporations such as Repsol that they could face 'exemplary action' from his government. The violence of the 2002 coup against Chavez is fresh in people's mind, but today's situation is far more worrisome since the relative legitimacy of Maduro is less clear.
Security expert Bruce Schneier’s key message is to "empathize, but not be terrorized." This is the same sentiment as Benjamin Franklin 250 years ago when this wise founding father stated:
“They that can give up essential liberty to obtain a little temporary safety, deserve neither liberty nor safety.”
This is as true today as it was at the time of the Revolutionary War.
"Gold has become much more affordable in recent days as the price has collapsed. Such a collapse is unpleasant, but not cause for concern," advises Dylan Grice. "Gold remains durable," as a source of protection from loss of confidence in the system, and, he adds "a correction was overdue. Now, the gold market has become healthier." Critically, Grice warns during this interview with Finanz und Wirtschaft, "gold will not protect against a crash in the financial markets, it showed 2008," since if many investors simultaneously urgently need cash, they sell everything they have, including gold. However, Europe is a time-bomb, China's credit bubble is ow where the US was before the financial crisis, and while inflation may not be an imminent threat (and likely shuffled more gold holders out leaving "a more stable investor base,") Grice concludes, "Gold endures. If confidence in the currency is lost, or in the bond market; Gold is a safe haven." There are good reasons to own gold. And to buy gold, there is now a reason more than a week ago: It's 30% cheaper.
Whether by intent or good fortune, gold's plunge in the last few days has reduced its appeal as a store of wealth and spurred the more central-planner-biased view that the US Dollar is the 'safest' place to deposit your hard-earned after-tax wealth. However, as Cypriots learned the hard way, trust in the entire system depends on the counterparty (in the case of bank deposits, you are implicitly lending your money for no return to a highly-leveraged entity) covered by an FIDC guarantee. As the following infographic makes very clear, that level of trust is remarkable when the reality is that gold is an asset without any counterparty risk and without any implied risk.
LETTER ADDRESSED TO A U.S. SENATE OFFICE INTERCEPTED AT U.S. CAPITAL, TESTS POSITIVE FOR RICIN POISION.
POISON LETTER WAS SENT TO SENATOR ROGER WICKER FROM MISSISSIPPI AT THE CAPITOL. FBI INVESTIGATING.
Ricin's toxic history is long and illustrious: starting with the death of Bulgarian dissident journalist Georgi Markov, using the infamous KGB umbrella, and most recently used by Walter White (unsuccessfully) to eliminate the meth dealing competition.
"In order for central banks to achieve their ultimate economic objective - which is growth and jobs - they have to push investors into taking more risk than is justified," is the somewhat chilling warning that PIMCO's Mohamed El-Erian gives in this excellent interview with the WSJ. "Central banks are operating through the wealth effect and animal spirits," El-Erian says peeling back the truth onion, as they prop up asset prices to "artificial levels, in virtually every market." Worries over the central bankers of the world withdrawing easy money policies too early are "unwarranted," he notes, adding that he suspects, "they will most likely stay too long and they will consciously make that mistake." Critically, though, he sends a message that appears to fit with many of our recent discussions (most recently here) that "if these levels aren’t validated by the fundamentals, then investors will get hurt."
Today's bounce back in gold prices is fading into the close and as Barclays Suki Cooper notes, despite some physical demand response to lower prices, it has not been sufficient to combat the overall decline. In the absence of support from physical buying, where does fundamental support materialize? Should gold just put on its commodity hat, instead of its increasingly more popular currency one, its cost of production should provide some guidance.